China’s Real Estate “Bubble” Inherently Different Than US in 2007

Attempts have been made to connect China’s surging real estate market to that of the bubble in the United States from 2002-2007. Although the surging prices do appear to be similar, there is a critical disconnect in the correlation: China has capital.

Stocks and Homes

Tightened monetary policy in the mainland has crushed Chinese stocks for the time being. Investors are concerned that without easy money policies, the rally could be halted, with the economy failing to find enough investment capital to keep moving. This thought is centered on fallacy, however, considering the extremely high savings rate of Chinese citizens and robust foreign trade which brings in billions of dollars each year.

In addition, attempts to put a stranglehold around the housing market will eventually prove to be unproductive. Currently, investors seeking to buy investment properties must put up 50% of the sale price and can finance the remainder. Believe it or not, that 50% requirement is actually up from 40%, the same amount in which the “bubble” came to be.

Monetary Policy Ineffective

Economists know that monetary policy in a country with double digit savings rates, an annual multi-billion dollar positive trade balance, and large capital requirements for real estate investment is ineffective. Since investors are required to put up half of the cost for new developments or investment real estate, only a fraction of the cost is borrowed.

Clearly, Chinese real estate investors are already independently wealthy, since their opportunities for profit are actually quite low. A home yielding a modest 8% per year in rents generates only 16% when leveraged with 50% down. Compared to the United States, when at the height of the bubble, homes were sold with 2-3% down and yields were in the triple digits, there really is no comparison.

Growth in Personal Wealth

The biggest contrast in the real estate markets in China and in the United States is the amount of personal wealth per capita. Though savings rates in China have come down in recent years, the middle class continues to grow, and as that middle class (future homeowners) has enough wealth to purchase a home, they will do so. The growth in China could be best equated to a reverse baby boomer era. While more and more people in the United States are retiring, and assuming lower standards of living, China’s new middle class is just emerging. With that emergence of the middle class, there will be even a further strain on finite resources, particularly real estate.